Deregulation or Protectionism?

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  • by Anup Shah
  • This Page Last Updated Sunday, January 17, 2010

For the neo-liberal, individuals make rational economic and social choices only through the market. For the statist, the state is the sole custodian of society’s interests, and its decisions their only reliable expression, with or without free elections. While the one ideology seeks to subordinate state to market, and the other the market to the state, what both succeed in doing is subordinating society’s will and the means of its expression. The alternative is that both state and market should be the servants of society rather than society being the servant of either. Whether the next century will be marked by unity and harmony rather than division and conflict depends in no small part on what democracy and citizenship are to mean in the age of globalization.

Brendan Martin, In the Public Interest? Privatization and Public Sector Reform, Zed Books (London), 1993. (Quote used on a Bretton Woods Project report on globalization.)

Protectionism: evil; Economic Liberalization: good — an oversimplification

Protectionism is an economic policy to restrain certain trade through measures such as tariffs, quotas and regulations. It is often used to discourage imports of certain goods and to protect domestic markets in various ways.

Protectionism is often regarded as a barrier to free trade. The word seems to conjure up negative images of isolationism and subsidizing industries that could otherwise not compete fairly against others. (This can help indicate why some industries would strongly support protectionism for themselves.)

Deregulation attempts to free economic activity from binding rules from the state. As a basis of free trade amongst nations, the idea is to allow competition to ensure the most efficient practices prevail, which should average out and benefit everyone.

However, deregulation, when applied to wider parts of society can be at the expense of people in that nation or region if that deregulation means relaxation of environmental rules, health and educational services, etc. In the context of corporate globalization it also risks stifling domestically grown industries as multinational corporations are more likely to have the resources to outcompete local ones. (This hints at the powerful lure that the “freeing” of trade and liberalization of access to resources from regulation has to some proponents.)

[The] moving of money through an economy is why there is so much wealth in a high-wage manufacturing and exporting country and so little within a low-wage country that is “dependent” on imports. With centuries of mercantilist experience, developed societies understand this well.

J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 66

Neither seems to answer the notion of fairness, though. Often those nations that promote free trade for all, want protectionism for themselves.

While free trade could be a possible way forward for fair trade, it can only be fair and free if large, developed nations do not continue protectionist practices for some of their industries, while hypocritically requiring (sometimes forcing) developing nations to abandon such measures, to the effect that it tips the trading balance unfairly in their favor.

Some aspects of how protectionism can be used by rich countries include

  • intervention in things like technology transfer, or distorting market functions
  • providing vast subsidies to local industries (for example, textiles, agriculture, footwear even intellectual property as this report mentions) while asking others to deregulate and become subject to the market’s natural force of supply and demand
  • one-sided trade agreements
  • even military expeditions to open and expand resource access.

For young industries, protecting and nurturing them can be a positive step, and historically this is how practically all industrialized nations have developed.

It is a much more complex situation that this section could describe alone, but many examples and issues are discussed throughout this web site but the concern is that the same developed nations are pressuring developing nations to aggressively abandon any protectionism, before their economies are ready to enter the global markets (even though protectionism has helped the US and Europe to prosper).

A common misconception in the mainstream (and even dissenting circles) is that one has to be either pro-market or against markets. However, less discussed is how power conflict affects the ideals of a market-based approach or what some of the fundamental problems are in a market or state approaches. Free Trade as an ideology or theory has many valuable and powerful points that have attracted countless supporters. The reality (or what politicians and others might call free trade) can be very different as was suggested in the criticisms of free trade section on this site. Hence, especially in the third world, the form of “free trade” being pushed by rich countries is coming under considerable criticism.

The following quote summarizes quite well that a fundamental issue, such as being pro-poor, transcends a limited debate of being simply pro-market or pro-state:

Consider, for example, the work and philosophy of SEWA, the Self Employed Women’s Association, which operates in Gujarat State in India. SEWA grew out of the long history of organizing textile workers in Ahmedabad, but applied and modified those lessons to organizing women in the informal sector. Starting from an urban base, it has now also expanded to organizing in rural areas (http://www.sewa.org). SEWA’s ground level campaigns, and their national advocacy work, reflects a pragmatism which eschews ideological positions on “state versus market”. They have supported certain types of trade liberalization because they increase the demand for the output and labor of their members. But they have opposed other types of trade liberalization when they hurt, for example, the employment and incomes of the husbands and brothers and fathers of their members. They are strong supporters of deregulating the control of the Gujarat State Forestry Commission on the livelihoods of their members. But they oppose deregulation of the pharmaceutical industry because of the devastating impact of these on basic drug prices, and they support increased regulation in Export Processing Zones to ensure that labor standards are met. Is SEWA pro-state or pro-market? It is difficult to say. What is clear is that SEWA is pro-poor. One of their best known pamphlets is in fact entitled “Liberalizing for the Poor.”

Ravi Kanbur, Economic policy, distribution and poverty: the nature of disagreements, January 2001

Adam Smith, often regarded as the founder or father of modern free market capitalism with his famous 1776 book, The Wealth of Nations describes England at that time undergoing a transformation and identifying how free markets in some scenarios were very beneficial to prosperity. He also described how mercantilism, big business as well as big government were often detrimental in many cases. Yet, while Imperial Britain may have claimed to take on free market ideology, the free trade imperialism that it was, was to the detriment of other nations, including America, that suffered under its policies of imperialism abroad, which allowed free trade to flourish somewhat domestically.

Depressions resulting in part from laissez faire capitalism and mercantilism led to many European nations turning to protectionism in order to keep competing between themselves. World Wars erupted when their rivalry got too intense and destructive. The American-funded rebuilt Europe, and even the emerging “Asian Tigers”, all followed protectionist measures, and once stable moved towards free markets.

It seems difficult to get the right balance between deregulation and protectionism especially between developed and developing nations. Too much deregulation of certain vital services, some of which could be seen as fundamental rights (such as health and education services) could lead to the inability to provide standards for the full range of the population and less protection for domestic industries against often larger or transnational corporations. On the other hand, too much protectionism could stifle innovation and even foreign investment. The reverse could sometimes occur as well, as many other issues come into play. For example, a regime that might be protectionist but not democratic may still ignore the needs of all the people.

World markets are a source of technology and capital; it would be silly for the developing world not to exploit these opportunities. But globalization is not a short cut to development. Successful development strategies have always required a judicious blend of imported practices with domestic institutional innovations. Policy makers need to forge a domestic growth strategy, relying on domestic investors and domestic institutions. The most costly downside of the integrationist faith is that it is crowding out serious thinking and efforts along such lines.

Dani Rodrik, The Developing Countries’ Hazardous Obsession with Global Integration, The South Centre, January 8, 2001

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Industrialized nations developed by protecting and nurturing their industries

J.W. Smith is quite critical of the current form of free trade and how it is pushed to poor countries:

That current free trade is just as unequal as the mercantilist trade it replaced is easily demonstrated. The structural adjustments imposed upon weak nations as necessary for free trade are the opposite policies under which every successful nation developed. Virtually every nation successfully developing did so under Friedrich List’s philosophy of protection of tender new industries and markets. That they developed under the philosophies of Adam Smith is a myth designed to hide a continuation of plunder through unequal trades.

J.W. Smith, Economic Democracy: The Political Struggle for the 21st Century, (4th Edition, 2005)

Even the likes of China, South Korea, and others became more developed using measures to protect their industries and so on, with various forms of controls.

The era of globalization can be contrasted with the development path pursued in prior decades, which was generally more inward-looking. Prior to 1980, many countries quite deliberately adopted policies that were designed to insulate their economies from the world market in order to give their domestic industries an opportunity to advance to the point where they could be competitive. The policy of development via import substitution, for example, was often associated with protective tariffs and subsidies for key industries. Performance requirements on foreign investment were also common. These measures often required foreign investors to employ native workers in skilled positions, and to purchase inputs from domestic producers, as ways of ensuring technology transfers. It was also common for developing countries to sharply restrict capital flows. This was done for a number of purposes: to increase the stability of currencies, to encourage both foreign corporations and citizens holding large amounts of domestic currency to invest within the country, and to use the allocation and price of foreign exchange as part of an industrial or development policy.

Mark Weisbrot, Dean Baker, Egor Kraev and Judy Chen, The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress, August 2001

But even in the 19th century, industries were protected as core countries were industrializing. Furthermore, “all Western European core economies had higher industrial protection than Brazil, China and India today when they had similar per capita income levels” as noted by Yilmaz Akyüz, former Director of Division on Globalization and Development Strategies at UNCTAD. Akyüz goes at length to look at how tariffs have been used in positive ways for industrialization, but how the rich nations are now “kicking away that ladder” that helped them progress, and making poor countries abandon such practices. He is quoted at length several times below:

Compared with the historical experience of mature and newly industrialized countries, trade policy in developing countries today appears to be unduly liberal. …a comparison of the historical experience of the three core Western European economies [Germany, France, United Kingdom] and the United States with the current situation in developing countries and LDCs, and three large developing economies [shows a number of things including]:

  • At the end of the 19th century when per capita income (measured in purchasing power parity) in the United States was at a similar level as that in developing countries today (that is, some $3.000 in 1990 dollars), its weighted average applied tariffs on manufactured imports was close to 50 per cent, compared to 8.1 per cent in developing countries and 13.6 per cent in LDCs today.
  • In 1950 when the United States was already an undisputed industrial hegemon with a per capita income of almost three times the per capita income of developing countries today, its average applied industrial tariff rate was higher not only than the average rate applied by developing countries but also by LDCs today. This is also true, to varying degrees, for Germany, France and the United Kingdom.
  • When the United States had the same levels of per capita income as Brazil or China today, its applied tariff rates were four times higher. When its per capita income was similar to India today (that is, around the mid 19th century), its average tariff was twice as high. Again, all Western European core economies had higher industrial protection than Brazil, China and India today when they had similar per capita income levels.

[The figures presented for the above], however, do not fully reflect the extent of protectionism in industrial countries in the past in comparison with developing countries today. High tariffs in the earlier period came on top of much higher transportation and information costs than today, which provided natural protection from imports, particularly for the European offshoots. More important, the underlying rationale for tariffs in followers is the productivity gap with the more advanced economies. As argued by Chang, “the productivity gap between today’s developed countries and developing countries is much greater than that which used to exist between more developed and less developed NDCs [now–developed countries] in earlier times. This means that today’s developing countries need to impose much higher rates of tariff than those used by NDCs in the past, if they are to provide the same degree of actual protection to their industries as that once accorded to the NDC industries.” For instance, even though the United States in 1913 had the same per capita income as Brazil today, it was already one of the most developed economies in the world with effectively no productivity gap with the industrial leader of the time, the United Kingdom.

… Since Brazil now faces a larger income gap with industrial leaders, the same level of tariffs would provide much less protection to its industry today than it did for the United States in the earlier period.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, pp. 10—13

If history can be any indicator, developing nations of today could benefit from some aspects of protectionism until they are at the point where they have a good foundation from which to start deregulating certain aspects (not always all) and trade more freely with other nations and regions with a similar foundation, adhering to rules of fairness and some forms of regulation that would ultimately benefit everyone, not just greedy elites!

But, as hinted to further above, economics does not act alone. Military power and politics also come into the mix. Akyüz again:

Political and military power also exerted a strong influence over the tariff policies of independent but weak states through the so-called unequal treaties. This includes the gunboat diplomacy in Asia forcing Japan and China to open up their markets to the United States and Britain respectively, as well as the 1860 trade agreement imposed on the Ottoman Empire by Britain when the country defaulted on its external debt, and public finances were effectively taken over by the creditors. Since the main objective in such instances was to make the weaker states open their markets, such treaties did not always promote harmonization, particularly when the imposing countries were protectionist. This was certainly the case when the United States forced Japan to open its markets while protecting vigorously its own.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, p. 14

Hans Rosling, Professor of International Health, and a founder of an organization to improve use and understanding of information, Gapminder, looks at the past 150 years of development contrasting US, UK, China, India and Japan, looking at how life expectancy (an indicator of health) and average income per person changed over the years.

While it doesn’t specifically talk about protectionism and liberalization, it is interesting to note in the 1970s when US and UK liberalized even more, their growth rate slowed (but still grew), while China’s and India’s increased, and then exploded in the 1990s after liberalization. (It may be that after a certain level of industrialization, growth will begin to level.) What the video doesn’t show (and it wasn’t its purpose) is that the effect of UK and USA’s geopolitical power over the past 150 years is also a factor in growth, so bearing in mind Akyüz’s observations, this video can be of interest:

Hans Rosling, Asia’s rise — how and when, TED Talks, November 25, 2009

Power politics continue to play out today, as Akyüz continues:

An important factor that favors greater harmonization is that once countries establish industrial dominance behind protectionist walls, they tend to advocate free trade in order to kick away the ladder from the followers and consolidate their dominance…. this was certainly the case for Britain in the mid 19th century which led the liberalization drive in Europe. The United States followed a similar path a hundred years later.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, p. 14 [Emphasis Added]

J.W. Smith also notes similar things:

Instead of developing the Third World, it is clear that the Third World dependency is a policy of the major powers, and the world leaders insist on restricting consumer buying power in the Third World as a price for what is essentially maintenance loans. Meanwhile, these same leaders easily agreed that West Germany must put $1 trillion into the former East Germany to simultaneously build industry, social infrastructure, and markets. And when the relatively poorer countries of Greece, Portugal, and Spain wanted to join the Common Market, these leaders “implemented a 15-year plan which included massive transfers of direct aid, designed to accelerate development, raise wages, regularize safety and environmental standards, and improve living conditions in poorer nations.”… Emerging former colonies receive no such care for their economies to become viable.

J.W. Smith, The World’s Wasted Wealth 2, (Institute for Economic Democracy, 1994), p. 150

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For poor countries careful and temporary protectionism can help nurture industries

In some regards, economic policies could be more destructive than weapons of mass destruction, as Akyüz also notes (p.15) that “the application of the non-linear Swiss formula [a way to reduce higher tariffs by greater rates] in current WTO negotiations could take ‘harmonization’ between developed and developing countries much further than was ever achieved under imperial rule or gunboat diplomacy.”

Akyüz describes at length the importance of different stages of development and their needs:

In examining this issue, it is important to bear in mind that successful industrialization is a cumulative process involving movements from one stage to another through the establishment of new industries with higher value-added and technology contents. In the earliest stages of economic development, production and exports consist largely of primary commodities while imports comprise mainly manufactures, both capital and labour-intensive products. Exporting at such a stage provides a vent for surplus; that is, it allows production to increase by making use of formerly unemployed resources because of lack of domestic demand.

…However, evidence strongly suggests that rich natural resources, even when combined with a well-developed human resource base, do not automatically lead to processing and diversification. Without active policies designed to promote and support such activities, being rich in natural resources can be detrimental to diversification away from unprocessed commodities…. Manufactures offer better growth prospects [over commodity processing] not only because they allow for a more rapid productivity growth and expansion of production, but also because they avoid the declining terms of trade that have frustrated the growth prospects of many commodity-dependent economies.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, pp. 16-17

Akyüz notes a number of different stages (p.18):

Sectoral specialization
An early stage of industrialization, exploiting natural resources and typically requiring unskilled labor
Diversification
This occurs as technologically more advanced activities are undertaken
Increased internal integration
This follows on from the continual diversification, through a dense set of linkages among sectors
Industrial maturity
When this finally occurs, there is almost a completion of a circle, where there is again a move towards sectoral specialization, but this time at the top end of the technology ladder.

Support and protection for industries varies at different stages (pp.18-19):

  • During the initial expansion in resource-based and labor-intensive manufactures, the support and protection provided to industry will likely be phased out after a relatively short period of learning and expansion in world markets, since such sectors tend to be technologically less demanding.
  • As traditional industries mature and become competitive, a new generation of infant industries would need to emerge and establish themselves. Indeed, an effective industrialization strategy should recognize that currently successful industries may, over time, confront difficulties in competing in international markets as domestic wages rise, low-cost competitors emerge, and the limits of learning and productivity growth are reached.
  • Hence, more dynamic and skill—and technology-intensive industries would need to be promoted simultaneously as resource-based and labor-intensive manufacturing successfully carries the economy forward.
  • Such an approach underpinned successful modern industrializers such as Korea…. Rather than seeking to maintain competitiveness by keeping down wage costs or protecting traditional industries with high tariffs, they chose to upgrade rapidly as a way of raising productivity, exports and incomes.
  • Entry into maturer markets against entrenched competitors can be slow and expensive, and an uphill battle “if left entirely to free market forces.” Support tools such as industrial tariffs, various forms of subsidies, may be required, sometimes for longer periods compared to less demanding, resource-based and labor-intensive manufacturing.

As new and more dynamic industries emerge, the traditional ones are phased out and may even be left entirely to countries at earlier stages of development. This pattern of modern industrialization has been dubbed “the flying geese paradigm.”

Yet, as Akyüz stresses (p.20) where these processes have been used (e.g. Japan on its way to industrialization), these are not market-driven; there is policy intervention in the form of infant industry support and export promotion in an attempt to even the playing field with more advanced economies.

Overlapping industries on the way to industrialization then seems to be the pattern.

Akyüz then accuses the WTO negotiations of failing to consider these intricacies in tariff discussions, instead going for simplistic and blanket reductions which may harm poorer countries that may require higher tariffs in some situations for certain periods of time. Furthermore,

More recently the tendency has been towards indiscriminate liberalization adopted in many low-income countries as a result of conditionality attached to adjustment lending by the Bretton Woods institutions [the World Bank and the IMF], and in some middle-income developing countries seeking access to markets in the North through bilateral or regional trade agreements.

… A key conclusion is that in a process of sequential build up of competitive industries under temporary infant industry protection, the optimal level and structure of tariffs would change over time. Consequently, focussing on the needs of existing industries or taking current levels of tariffs as the basis for commitments in the WTO could subsequently present serious setbacks to technological upgrading…. emphasizing short-term benefits to the neglect of longer-term industrialization could lock it into the current pattern of industrial specialization, making it difficult to move up on the technology ladder. Similarly an LDC can remain dependent on primary production and exports if it is denied the space to develop industries for labour-intensive manufactures. [Emphasis Added]

… the proposed tariff cuts in the WTO negotiations would erode flexibility of developing countries in using trade policy for industrial development.

… The key issue here is how to reconcile multilateral discipline with policy flexibility needed for industrial development. As shown above, developing countries do not need high tariffs for all sectors and all the time. But they should have the option of using tariffs on a selective basis as and when needed for progress in industrialization. They should not be expected to keep moving tariffs downward from one trade round to another, but be able to move them in both directions in different sectors in the course of industrial development.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, pp. 23, 25, 26

As an alternative then, Akyüz suggests (p.28) that allowing countries to have a bit more say over their policies within a framework of an average bound tariff as opposed to a line-by-line prescription per industry/product, would have a number of benefits:

  • Policy flexibility while maintaining multilateral positions;
  • Encourage countries to view tariffs as a temporary instrument by ensuring infant-industry protection succeeds in establishing competitive industries;
  • Encourage country trade negotiators to take a long term view rather than focusing on immediate needs of their industries.

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Rich countries preaching liberalization to poor countries

As noted on this site’s criticisms of free trade section, the elite, even of poorer countries, often pressure poorer countries to liberalize and enter the global market before they are ready. Akyüz also notes this, adding the cost of doing so:

Developing countries are once again facing intense pressure to liberalize trade in industrial products even though the extravagant benefits claimed from the Uruguay Round [of trade talks] have been belied by subsequent experience. According to one estimate, the Uruguay Round’s combined liberalization increased global economic welfare by $75 billion, of which almost $70 billion went to developed countries, $5 billion to Newly Industrialized Economies (NIEs; Korea, Singapore and Taiwan), and none to developing countries taken together. Despite this, recent years have seen a proliferation of similar exercises, claiming large benefits from further trade liberalization for the world economy in general and for developing countries in particular. The gains estimated by various studies from full liberalization of goods and services trade, or trade in goods alone, range from a couple of hundred billion dollars to more than $2.000 billion. On some accounts, the incidence of gains to developing countries reaches as much as 65 per cent of the total.

… [such estimates] are one-off static gains expected to result from reallocation of resources after trade liberalization. They are derived from computable general equilibrium (CGE) models based on the neoclassical paradigm of competitive equilibrium where markets [are] always clear and resources are fully employed. These estimates do not provide a reliable guide to what might happen in reality because of two interrelated shortcomings of the CGE models:

  1. … a theory that assumes away various imperfections and rigidities that pervade developing economies and lead to market failures, including externalities, incomplete markets, imperfect and asymmetric information, monopolies or imperfect competition. The incorporation of any of these could lead to problems … leading to uncertainty about the outcome of trade liberalization.
  2. … From the way the economies are assumed to work follows the prediction that the equilibrium state with lower tariffs will have higher income and welfare. But even then, this does not mean that a reduction in tariffs would necessarily lead to another equilibrium state with a higher level of income. This depends on how the economy will react to disequilibria generated by liberalization.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, pp. 29, 31-32

What Akyüz is noting is that from one flawed basis, more conclusions are drawn, and then from that, even more, and so on, leading to a number of conclusions — and worse, policy prescriptions — that have little bearing on reality. It is similar to the game “Chinese whispers”, or the “snow ball effect” where one basis leads to another which appears to reinforce itself. When it is too big, the original is often forgotten and less likely to be questioned.

“Adjustment” policies are then introduced to get poor countries to liberalize. As seen on this site’s section on Structural Adjustment, these policies have been devastating, leading to further poverty for many millions. Such costs are often minimized as Akyüz notes:

There is a tendency to underplay adjustments costs on grounds that they are relatively small compared to (potential) benefits from reallocation of resources, as maintained in a recent WTO paper: “Although the economy may be worse off in the short-run, the gains from trade will outweigh short-run adjustment costs in the medium to long-term … Existing studies find that the benefits from trade exceed adjustment costs not only in the long-run where the cost to benefit ratio is estimated to be lower than 4 per cent, but even during the adjustment period.” However, as the authors themselves recognize “measures of adjustment costs in existing empirical work are crude and imprecise” and “the empirical evidence … is restricted to industrialized countries”, and “may not be representative for the case of other countries” since “the institutional settings and the functioning of domestic markets will affect the size of adjustment costs.”

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, p. 34

Given the enormous cost in lives and poverty of adjustment costs imposed on most of the Third World, and given that the WTO implies that the trade benefits outweigh these costs, then the third world should be the first world by now, as these policies have been prescribed for decades.

Fundamentally, Akyüz notes (p.34), “the real question is whether a sound analysis of trade liberalization can be undertaken in models premised on the neoclassical tradition.” The answer seems to be no. However, worse than that, given the neoclassical tradition is the mainstream in economics, the implications for the third world are chilling:

Thus, the mainstream theory and the CGE models tell us that at the current levels of technological capability, firms in developing countries cannot compete with those in advanced industrial countries in skill—and technology-intensive products so that any rapid move towards free trade implies that developing countries would withdraw their resources from these sectors and redeploy them to low value-added, resource-based and labour-intensive industries.

… [despite claims otherwise, ] more recent experience also shows not only that import liberalization does not guarantee a strong export performance, but also that improved export performance is not always mirrored by acceleration of industrialization and growth.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, p. 36

In other words, there may be growth, but no “progress” in the technological sense or development in the more general sense. Also, the above, in effect, describes a similar pattern of inequality as seen in colonial times. One can understand a bit more why some call the current global system a form of neo-colonialism or neo-mercantilist/monopoly capitalism.

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Rich countries practicing protectionism at home when it suits

At the beginning of March, 2002, U.S. President George Bush announced tariffs on imported steel from the European Union. He said “We’re a free-trading nation, and in order to remain a free-trading nation, we must enforce law. And that’s exactly what I did. I decided that imports were severely affecting … an important industry.” This is quite remarkable a series of sentences, because on the one hand he is supporting “free trade” but on the other hand, he wishes to protect his industries (which can be an understandable concern), which goes against the notions of free trade! In Europe, this of course has raised a lot of concern, especially when the U.S. has been most vocal in the international arena about getting other countries to open up their markets and embrace free trade.

Bush said the US steel industry which has been hit by rising bankruptcies would be protected a little bit against cheap imports. But the EU, according to the British paper, The Guardian, says that the problems facing the US steel industry come not from imports, which have been declining, but from its failure to make itself competitive during the 1990s.

This highlights important concerns not only about the impacts of protectionism, but also the impacts of free trade, as both in their most literal forms can affect different segments of society in various ways. If other nations decided to impose such tariffs on U.S. or other imports, then there would be even more trade wars. On the one hand, there is an important need to protect developing industries, and create stable internal market economies, while on the other hand, protecting inefficient industries in the heat of competition can have detrimental international ramifications.

The U.S. Farm Bill that followed, likewise has also been a protectionist policy. The developing world has often criticized the double standards of rich regions such as Europe and the United States of demanding (and even forcing) free market ideology and liberalization of the economies of poor countries, but protecting their own industries. One major area of concern has been agriculture which impacts the developing world considerably. In fact while the E.U. rightly pointed out that the U.S. was being protectionist, the E.U. itself has long been highly protectionist itself. Oxfam captures some of this:

We now have the unedifying spectacle of two economic giants locked in a war of words and numbers over agricultural trade policies, each one accusing the other of being more protectionist, while the developing countries are trampled underfoot.

On 13 May 2002, it was the turn of the USA to bring the boot down on developing-country agriculture, when it agreed a Farm Bill which will dole out up to $190bn to US agri-business over the next ten years — an enormous increase of 70 per cent in payments. Before the Bill passed, White House officials admitted that it would greatly encourage overproduction, fail to help US farmers most in need, and jeopardise markets abroad. According to the European Commission, “there is no doubt that the vast bulk of payments under the Farm Bill will go to the largest agri-businesses”. Third World producers will find it harder to sell to the US market and, since the USA exports 25 per cent of its farm production, they will find it harder to sell in other international markets or to resist competition from US products in their home markets. The disposal of increased US surpluses as 'food aid' is likely to compound the loss of livelihoods.

Europe’s Double Standards. How the EU should reform its trade policies with the developing world, Oxfam Policy Paper, April 2002, p.12 (Link is to the press release, which includes a link to the actual Microsoft Word document from which the above is cited.)

New York Times columnist and professor, Paul Krugman, a free market supporter, and often a harsh critic of anti-corporate globalization protest movements, has been quite critical of U.S. policies, which he describes quite bluntly as being protectionist:

Some months ago an academic colleague — a man with strong Democratic connections — urged me to write a couple of columns praising the Bush administration. “What should I praise?” I asked.

There was a long pause — funny, isn’t it, how “balance” becomes a goal in itself? — but eventually he came up with something: “How about its commitment to free trade?”

Ahem. In fact, George W. Bush has turned out to be quite protectionist. The steel tariff and the farm bill attracted the most attention, but they are part of a broader picture that includes the punitive (and almost completely unjustified) tariff on Canadian softwood lumber and the revocation of Caribbean trade privileges. When it comes to free trade, the Bush administration is all for it — unless there is some political cost, however small, to honoring its alleged principles.

Paul Krugman, The Rove Doctrine, New York Times, June 11, 2002

Chief researcher of the international development organization Oxfam, Kevin Watkins, has been very critical of U.S., European and Japanese trade policies, even charging them with hypocrisy for preaching free trade but practicing mercantilism:

Looking beyond agriculture, it is difficult to avoid being struck by the discrepancy between the picture of US trade policy painted by [US Trade Representative, Robert] Zoellick and the realities facing developing countries.

To take one example, much has been made of America’s generosity towards Africa under the Africa Growth and Opportunity Act (AGOA). This provides what, on the surface, looks like free market access for a range of textile, garment and footwear products. Scratch the surface and you get a different picture. Under AGOA’s so-called rules-of-origin provisions, the yarn and fabric used to make apparel exports must be made either in the United States or an eligible African country. If they are made in Africa, there is a ceiling of 1.5 per cent on the share of the US market that the products in question can account for. Moreover, the AGOA’s coverage is less than comprehensive. There are some 900 tariff lines not covered, for which average tariffs exceed 11%.

According to the International Monetary Fund (IMF), the benefits accruing to Africa from the AGOA would be some $420m, or five times, greater if the US removed the rules-of-origin restrictions. But these restrictions reflect the realities of mercantilist trade policy. The underlying principle is that you can export to America, provided that the export in question uses American products rather than those of competitors. For a country supposedly leading a crusade for open, non-discriminatory global markets, it’s a curiously anachronistic approach to trade policy.

Kevin Watkins, Trade hypocrisy: the problem with Robert Zoellick, Open Democracy, December 12, 2002

Watkins lists a number of other areas, besides the AGOA that are beset with problems of hypocrisy, and concludes that “nihilism and blind pursuit of US economic and corporate special interest represents an obstacle to the creation of an international trading system capable of extending the benefits of globalization to the world’s poor.”

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Rich countries using protectionism as trade bargaining chip

The albeit flawed 2005 G8 Summit, the accompanying Make Poverty History Campaign and the Live 8 concerts raised a little bit more awareness about the unfairness in First world subsidies and tariff protection for certain industries which end up harming poorer nations.

However, there seems to be a risk that up-coming WTO discussions will see tariffs and subsidies being used as a bargaining chip: an offer by rich countries to possibly remove some of theirs in return for poor countries to agree to perhaps a similar level of reduction. While that might sound fair and equal, it is the wrong type of equality because, as Akyuz has detailed (and quotes at length above), different countries at different stages of development and for different industries will require different levels of tariffs and other forms of protection/nurturing. Media spin that typically accompanies such trade discussions may not make this important clarification, which will be important noting.

Akyuz notes this concern as well, also observing that rich countries use other techniques such as claims of dumping and meeting certain high standards, while designed as a tool to allow protectionism (corporate welfare) to continue:

Developed countries are in effect offering to cut such tariffs [of their more inefficient industries that now need protecting behind high tariffs] in return for across-the-board cuts in tariffs by developing countries, including those protecting learning in skill—and technology-intensive industries that should eventually be removed with maturity. In any case, as recent developments in trade in textile and clothing clearly demonstrate, the value of these offers in practice is much less than what they appear to be because of the tendency and capacity of major industrial countries to restrict exports of developing countries through anti-dumping duties, safeguard measures and ‘voluntary’ export restraints.

Such a deal cannot be considered as an equitable exchange regardless of the percentage cuts involved. In this respect, the proposal made by the Chairman of the Negotiation Group on Market Access for zeroing tariffs in a number of labour-intensive products … as well as in technologically more demanding products … is perhaps the most blatant push for an unequal exchange between tariffs used to protect unviable industries in developed countries and those needed for infant industry promotion in developing countries.

UNCTAD estimated that rolling back [rich country] protectionism in this area could create additional export earnings of up to $700 billion for developing countries, to be realizable over a 10-year period. This is less than 5 per cent of the combined GDP of industrial countries, but could absorb an important part of unemployed labour in the South and generate a vent for surplus.

Yilmaz Akyüz, The WTO Negotiations On Industrial Tariffs: What Is At Stake For Developing Countries?, Third World Network, May 2005, pp. 41—42

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Can developing countries avoid rich country strangle-hold?

A strategy for developing countries may be in deciding which industries to nurture (temporarily) and which sectors to further liberalize sooner.

As Akyüz mentioned further above, a number of realities can impact the otherwise appealing free trade ideas, including externalities, incomplete markets, imperfect and asymmetric information, monopolies or imperfect competition.

Akyüz also added that even if liberalization was followed in the manner the rich countries asked, it is not guaranteed that it will result in progress for all within a nation. Higher income could result, but social inequalities could remain. The US and UK are arguably the most liberal in their domestic economic policies, and while there are clear advantages in some sectors, social inequalities and related problems are generally higher in these economies than most other industrialized nations.

Developing countries may have a case for nurturing some of their industries rather than opening their economies to competition with multi-nationals. However, in some scenarios this could also be inefficient.

For example, mobile phone companies are helping people throughout Africa to connect to each other and even stimulate economic activity. For most African countries it perhaps makes sense to let such businesses in, rather than trying to develop their own, due to lack of resources and technological base. Yet, at the same time, if this is followed, how will African nations break out of that chain? What if African nations could be more economically efficient with this technology?

There is often talk of technology transfer and partnerships between a multinational company and a local business/industry. However, would a multinational want to create real competition for itself and risk shutting itself out of a market, or having to compete with a local business that might be better placed to respond to the local customs and culture?

Political factors will also be prevalent. For example, many nations will see food security as crucial and even if other countries may be more efficient producers of some food items, a nation may decide to grow some of their own and support their farmers. Even if this seems inefficient from an economic perspective, factoring in geopolitics and actions by the rich nations such as food dumping, manipulative foreign aid and first world farm subsidies may make other nations factor in political terms.

The idea of breaking away from dependency, especially from the first world, was prevalent during the wave of anti-colonialism and the breaks for freedom post World War II. At the same time, many economists argue that inter-dependency through trade can also be a good thing; nations trading that which they are not themselves efficient at producing, and when done in a fair and just environment, leads to cooperation.

However, many developing countries are suspicious of first world nations’ intentions, whether it is geopolitics, help with debt, foreign aid, or more.

Could regional free trade, whereby trade is amongst nations of similar levels of development, be an even better option in that context?

These and many other options all need consideration by policy makers in developing countries. However, they need to make those decisions in an accountable manner. Even though many developing countries are democracies, or democratizing, there are many problems such as corruption, inappropriate influence from outside (including from rich countries), lack of resources, and so on. In so many cases, as discussed in this site’s sections on debt, G8, and foreign aid, rich nations and institutions end up leading or dictating the manner in which developing countries should develop, leading to less accountable, and often inappropriate, decisions.

Much of the above has been written many years ago. During 2009 and 2010, a global financial crisis, starting in the US, has hinted at a shift in economic and geopolitical power. Some emerging nations such as China, India and Brazil have gained more voice, and developing countries on the whole have gained more courage to speak up against unfair policies from wealthy nations.

At the same time, reactions to the crisis has led many of these wealthier nations to urge countries not to resort to protectionism even though they themselves are resorting to such measures to try and stimulate their economies or fight off growing political discontent (see previous link for more information).

The sound bytes and summary agreements (between the wealthier countries and richer emerging nations) again ignore whether protectionism is equally bad or good for different countries at different levels of development and whether “business as normal” is applicable during a crisis of such magnitude. The next few years will be important to see how the effects from the global financial crisis change or maintain the status quo for poorer countries.

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Author and Page Information

  • by Anup Shah
  • Created: Monday, September 07, 1998
  • Last Updated: Sunday, January 17, 2010

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Document Revision History

DateReason
January 17, 2010Small updates: a video about historical development, and small note about global financial crisis and protectionism.
August 4, 2005Added more about tariffs, its historical use, and how rich countries are trying to get poor countries to reduce their tariffs in an unfair way. (The remainder untouched since December 12, 2002)

Alternatives for broken links

Sometimes links to other sites may break beyond my control. Where possible, alternative links are provided to backups or reposted versions here.